Holiday Pay problems in New Zealand

What’s up with so many New Zealand businesses announcing remedial payments for underpaid holiday pay?

How could everyone get the law so wrong?

The law in question is the Holidays Act 2003 and in it is a simple principle – employees get four weeks of leave a year. This is an important core principle – four weeks of leave to rest and recuperate and spend time with friends and whanau.

This simple principle stems back to the Annual Holidays Act 1944 –

Every worker shall at the end of each year of his employment by any employer become entitled to an annual holiday of two weeks on ordinary pay.

These were different times, a time when men went to work while women were expected to stay at home tending to domestic work. Most workers had a fixed number of hours each week and an ordinary time hourly rate that would be paid for those hours.

Blast forward 75 years and we now have a situation where most employers, including the Ministry tasked with enforcing the law, are not able to understand it. How could it have changed so dramatically from the original concept of two weeks at the ordinary time rate?

The current law has had a number of iterations over the years and now says that employees are entitled to four weeks of leave a year at the ordinary weekly rate. Sure, there’s a few extra complexities thrown in but let’s not get bogged down in detail at this stage.

The big difference here, apart from the two-fold entitlement increase, is the change in rate from the 1944 hourly definition to being a weekly rate. This is a crucial change from paying hours at the ordinary hourly rate to paying weeks at the ordinary weekly rate. The rate now factors in variability in the hourly rate employees receive for overtime and penal rates.

But what is a week in terms of hours and pay for an employee who one week works one day and the next week works five days?

To overcome the problem of time variability the law conveniently added some more rules. Put simply, if it is not possible to determine an employee’s ordinary weekly pay the pay is calculated as the average weekly rate over the last four weeks.

How about longer term variability like workers whose work is seasonal, shouldn’t they also get paid at a weekly rate that takes into account the long hours they worked during the season?

No problem, another rule is added – if the average weekly rate over the last year is higher than the four week average then use that rate instead.

So the law as it is today nicely handles all types of variability of work patterns –

• differing hourly rates

• changing hours per week

• Seasonal work patterns

So how did businesses get it wrong?

In accounting it’s important to track the debt a business owes in order to give an accurate position of equity for shareholders. Accruing the debt owed to employees is crucial to determining whether or not a business is solvent and has the ability to pay all debtors.

When payroll became computerised in the 80’s and 90’s it was often tied to accounting systems. Accruing holiday leave was a practicable way of ensuring an accurate and consistent value of leave debt was reported to shareholders. The easiest way of accruing leave debt as you go was to base the accrual on the hours worked.

Unfortunately, accruing leave entitlements based on the hours worked by employees over time means that the entitlement is fixed to the units of hours and not weeks as the law now requires.

Even the Ministry of Business, Innovation and Employment acknowledged this method of accruing leave based on 4/52 of the hours worked in a paper published in 2013 –

Where an employee has an irregular or changing work pattern over the entire 12- month period, so there is no pattern to the hours worked and the hours and days of work are entirely irregular, the principals of four weeks annual leave and reaching agreement on what will constitute “four weeks” in terms of time away from work, still apply. In such cases where the hours and days of work are irregular and intermittent employers and employees sometimes agree to accrue time towards annual leave on the basis of 4/52 for every hour worked.

As an example say you work eight hours per week for a year and you become entitled to four weeks of leave. In our accounting system we’ve accrued 32 hours of leave (four weeks at eight hours per week). But if the employee increases their hours per week to 32 the accrued balance only lets them take one week of leave and so the requirement of four weeks under the Act can’t be met.

The core principle that every employee be able to take four weeks of leave a year is obviously important. Let’s say in the example above that the employer lets the employee take four weeks off. But because they’ve only accrued 32 hours of leave they will only be paid for eight hours each week when now the employee has become used to receiving pay for 32 hours each week. They may have debt themselves they are only able to service based on their new higher weekly income. Even given the ability to take four weeks off it won’t be a time they’ll rest easy with the worry of debt repayments during that time.

So if the law covers all the different situations of variable work patterns and the problem is with the way businesses are accruing leave why all the calls for it to be fixed?

The problem with the law is that it creates perverse incentives and unfairness between employees.

Two employees who work the same number of hours at the same pay rate could be paid vastly different amounts for the four weeks of leave depending on when they take it.

How could this happen?

Let’s take the hospitality industry as an example. In December hospo businesses normally have a huge increase in demand as Christmas parties and longer warm nights start to make going out after work more appealing. These businesses often increase the work hours for staff during this time to handle the extra demand.

Let’s say two employees ordinary week goes from 20 hours to 60 hours per week. They both have four weeks of annual leave available.

The clever employee chooses to take their leave in January when work has quietened down as everyone goes on holiday. This employee is paid at the ordinary weekly rate from the preceding four weeks i.e. 60 hours per week.

The other employee chooses to take their leave in February. For the preceding four weeks their hours have dropped back to the regular 20 per week. They will only get the average weekly rate over the previous year which will be equivalent to only 23 hours per week.

The lucky January holiday goer gets two and a half times the holiday pay that the February holiday goer gets.

When put this way it seems that potentially the accrual method of evaluating four weeks entitlement is fairer. For both employees the pay would have been the same whether taken in January or February.

In March 2018 the government announced a review of the Holidays Act. The review hasn’t yet been released although it is with the Minister currently.

Here’s hoping that the outcome of the review are changes that make the Act fairer and easy to implement as well as maintaining the core principle of giving employees four weeks off each year to rest and recuperate and spend time with friends and whanau.